In the annals of Ponzi schemes, Shawn Merriman is small potatoes. But when the Securities and Exchange Commission announced April 8 that it had charged Merriman of Aurora, Colo. with fraudulently obtaining $17 million to $20 million, the agency’s new director of enforcement, Robert Khuzami, seized on the news. “We pursue Ponzi schemes with a great sense of urgency,” he said, “and bring cases swiftly and successfully to protect investors.”

During the first three months of 2009, the SEC has brought over two-dozen emergency enforcement actions to “halt an ongoing fraud,” added Khuzami. Nine of the cases announced by the agency this year were related to Ponzi schemes; over the same period in 2008, there were none. Observers haven’t had to look far for the reason for the sudden interest.

The SEC says Linda Thomsen is leaving to pursue opportunities in the private sector, but did not provide further details. She has been the agency’s enforcement director since May 2005.

Thomsen became a lightning rod for criticism over the SEC’s failure to detect the $50 billion Ponzi scheme allegedly run by money manager Bernard Madoff, despite red flags raised to the agency staff by outsiders over the course of a decade.

House lawmakers on Wednesday accused the Securities and Exchange Commission of impeding their probe into the agency’s failure to uncover the alleged $50 billion Bernard Madoff fraud.

The clash between lawmakers and high-ranking SEC officials at a House Financial Services subcommittee hearing came after the man who waged a decade-long campaign to alert the regulators to problems in Madoff’s operations denounced the agency for its inaction. Whistleblower Harry Markopolos also said he had feared for his physical safety and would turn over new evidence that Madoff had not acted alone.

In loud, angry exchanges, lawmakers threatened to issue subpoenas to SEC officials to compel their testimony in the case.

Seventeen years ago, federal investigators questioned for the first time whether Bernard L. Madoff was connected to a Ponzi scheme. Their inquiry centered on Frank Avellino, an accountant who had been funneling investors to Mr. Madoff since the 1960s.

The investigators did not get far. Within days, Mr. Avellino agreed to return to investors the money he and his partner had raised and to pay a small fine to the Securities and Exchange Commission. The inquiry petered out, and Mr. Avellino — represented in the case by Ira Lee Sorkin, the same lawyer who now represents Mr. Madoff — kept sending money to Mr. Madoff.

Now questions have again arisen about the ties between Mr. Madoff and Mr. Avellino. A lawsuit claims that Mr. Avellino warned his housekeeper, who had invested with him, that her money was lost 10 days before Mr. Madoff’s fraud became public.

Through his new lawyer, a former federal prosecutor, Mr. Avellino declined to comment on his relationship with Mr. Madoff.

But archived court documents from the 1992 case reveal numerous red flags that raise questions about the S.E.C.’s failure to examine Mr. Avellino and Mr. Madoff long before Mr. Madoff’s apparent Ponzi scheme spread worldwide. The documents show that Mr. Avellino and Michael Bienes, his business partner, kept almost no records at Avellino & Bienes, a firm that oversaw $440 million. When court-appointed auditors asked Mr. Avellino to prepare a balance sheet, he responded that ”my experience has taught me to not commit any figures to scrutiny.”

January 6, 2009

Can’t say it’s undeserved. This year has been an abject failure of the meager regulatory role the SEC has been asked to perform over recent years. There wasn’t much to regulate, and what little was expected either didn’t happen, or was so incompetent it might have not been there at all.

Lawmakers on Monday raised a number of regulatory reform ideas for the Securities and Exchange Commission in light of the agency’s failure to identify an alleged $50 billion Ponzi scheme operated by New York investor Bernard Madoff.

“The inability of the SEC to identify failure at the Madoff funds for almost a decade has exacerbated cynicism among investors and delayed recovery [of the financial industry],” said Rep. Gary Ackerman, D-New York.

Madoff, who was arrested in December and charged with securities fraud, oversaw a fund that managed capital for investors of varying income, hedge funds, banks and institutions including foundations, pension funds and charities.

In response to Madoff’s arrest, a number of lawmakers on the House Financial Services Committee said they want to examine whether legislation should be drafted that reforms the way the SEC inspects investment fund managers, how fund accounting firms are regulated and whether agency commissioners should be prohibited from immediately taking jobs in the financial services industry when they finish their stint at the commission.

Others sought more resources for the SEC’s enforcement bureau and raised concerns about the expertise levels of agency fund oversight officials.

Of course this comes as no surprise. During his two terms, Bush 43 has actively undermined government at every turn. I enjoy small govenment as much as any libertarian could, but I also value competence (at the very least) for the government we must have.

Heckuva job there, Georgie.

From the link:

Before his downfall in an alleged fraud that may end up costing investors $50 billion, Wall Street money manager Bernard L. Madoff circulated a promotional message extolling his service to clients.

“Customers know that Bernard Madoff has a personal interest in maintaining the unblemished record of value, fair-dealing and high ethical standards that has always been the firm’s hallmark,” Madoff proclaimed in a brochure designed to drum up more business.

The brochure called attention to the high-tech trading side of his business that was supposedly honestly run and legitimate, but it also offers a glimpse of why the Securities and Exchange Commission was unable to stop Madoff in his tracks despite repeated warnings.

As financial markets have grown increasingly complicated _ which was the case with this part of Madoff’s operation _ the SEC has struggled to keep up with the changes.

The circumstance of this relatively tiny bureaucracy _ 3,567 employees including clerical workers _ is that of an agency overwhelmed.

The United States Government runs its own balance sheet based on the Ponzi principal as well. Our national debt always grows and never shrinks. As existing debt matures, proceeds are repaid by issuing new debt. Interest payments on existing debt are also made by selling new debt to investors. The whole scheme depends on an ever growing supply of new lenders, or the willingness of existing lenders, to continue to roll over maturing notes. Of course, as was the case with Madoff, if enough of our creditors want their money back, the music stops playing.

In Madoff’s case, the rug pulling was provided by the huge financial losses suffered by some of his clients in other non-Madoff investments. When enough of these clients looked to sell some of their apparently well-performing Madoff assets to help offset such losses, the scam collapsed. The same thing could befall the United States Government. Now that China and our other creditors are looking to spend some of their U.S. Treasury holdings to stimulate their own economies, look for a similar outcome with even more dire implications.

The main difference is that while Madoff took elaborate steps to conceal his scheme, the U.S. government operates in broad daylight. It truly is amazing how faith in government is so pervasive that many can believe that politicians will succeed where private individuals fail, and that governments are somehow immune to the economic laws that govern the rest of society. Like those unfortunate to have been duped by Madoff and Ponzi, the world is in for a rude awakening.

December 12, 2008

Bernard Madoff, a quiet force on Wall Street for decades, was arrested and charged on Thursday with allegedly running a $50 billion “Ponzi scheme” in what may rank among the biggest fraud cases ever.

The former chairman of the Nasdaq Stock Market is best known as the founder of Bernard L. Madoff Investment Securities LLC, the closely-held market-making firm he launched in 1960. But he also ran a hedge fund that U.S. prosecutors said racked up $50 billion of fraudulent losses.

Madoff told senior employees of his firm on Wednesday that “it’s all just one big lie” and that it was “basically, a giant Ponzi scheme,” with estimated investor losses of about $50 billion, according to the U.S. Attorney’s criminal complaint against him.